Commonwealth Bank of Australia (CBA)

Bank of America Merrill Lynch has downgraded
Commonwealth Bank of Australia
to “underperform" with a price objective of $51.20 per share in line with perceived downside risks to the company’s earnings.

“CBA reported first quarter [net profit after tax] of $1.85 billion, in line with our run-rate. There were no major areas of weakness but no obvious bright spots, which gets to the heart of the challenge facing the stock. With 50 per cent of the group underlying profit generated by Australian retail and wealth the bank is feeling the low growth and margin pressures in those divisions, reflected in its subdued profit growth generation. The degree to which cost control and CBA’s IT advantage can offset this remains uncertain in our view."

The broker says that while CBA is a well-run, high-return business with sound operational performance, a subdued credit growth outlook, growing retail margin headwinds and linkage to equity markets in the wealth division are concerning.

Merrills is forecasting earnings per share of $4.54 in 2013, $4.63 in 2014 and $4.78 in 2015. CBA reported EPS of $4.49 in 2012.